Guernsey: New Direction

Gavin Ferguson and Siena Gold of Appleby explore how the
proposed Guernsey foundation can form part of a larger wealth
management structure to help the Island target different
markets.

The Guernsey foundation is an incorporated entity with a
separate legal personality. Unlike a company, it does not have
shareholders to whom the board are accountable. Instead, the
foundation holds assets (in its own name) on behalf of
beneficiaries, particular purposes, or both, and in accordance with
the foundation's constitution. As such, although it looks
similar to a company, its operation is more akin to that of a
trust. However, a foundation is neither.

The foundation's constitution comprises (i)
a charter setting out (broadly) the foundation's purposes,
initial assets and duration (1), and (ii) rules
prescribing (among other things) the functions of the council and
procedures they must follow. There are no 'trustees'.
Instead, council members perform much the same role, have a duty to
the foundation to act in good faith, and cannot, without express
authorisation, profit directly or indirectly from their
position.

As with Guernsey law trusts, the level of involvement that the
founder (the person settling initial assets into the foundation) or
the beneficiaries may have in running the foundation is flexible.
Subject to certain restrictions (2), the founder may reserve the
power to amend, revoke or vary the terms of the constitution and,
if the constitution allows, may also change the purpose of the
foundation or terminate it altogether. Also, in principle, it is
possible for the founder to appoint themselves as a beneficiary
(subject to tax and professional advice) and to reserve powers such
as the power to remove council members. Beneficiaries, in general,
have the right to full and accurate information about the
foundation property (within three months from the date of their
request).

They may apply to court to amend the foundation's purpose or
have it wound up. They can also be council members. However, it is
possible for the constitution to 'disenfranchise' the
beneficiaries, meaning they have no right to information at all.
Then a guardian must be appointed. Their role is similar to that of
an enforcer of a purpose trust, who has a duty to supervise the
council and act in good faith and en bon père de
famille (i.e. as a prudent administrator of family
wealth).

Private, charitable and corporate potential of
foundations

As with trusts, foundations can have multiple uses, including
for private, charitable and corporate purposes, and they can be
incorporated into a variety of potential structures tailored to
suit a particular client's needs.

1. Private

Guernsey law foundations can be drafted and structured to
address some of the chief wealth planning concerns of clients.

Confidentiality

As outlined above, a foundation's beneficiaries may be
'disenfranchised', meaning they are not entitled to any
information about the foundation. Although enfranchised
beneficiaries have greater rights, pursuant to s27 of the law, they
still have no statutory right to see any documents that reveal the
deliberations or reasoning behind the council's exercise of its
functions or decisions. Note that as the foundation is a separate
legal entity, and not merely a legal obligation between a
beneficiary and trustee, the beneficiaries have no specific
interest in the assets, so councillors are answerable to the
foundation itself and not the individuals personally –
although the supervisory role of the guardian (if any) and the
Royal Court ensures that council members can be held to
account.

Some clients may worry that because foundations are registered
entities, they are, unlike trusts, publicly visible.

However, under the Guernsey law, only the name and registered
number of the foundation, details of the registered office and name
and address of the councillors and guardian (if any) are available
to the public. Unlike other jurisdictions, such as Jersey and the
Isle of Man, the whole charter is not commonly visible –
although it must be filed with the registrar. Any person (including
councillors or guardians) who illegitimately discloses information
held privately by the registrar will commit an offence, and there
are very limited circumstances when such information may be
legitimately disclosed (such as when relevant to a criminal
investigation).

Although this limited visibility may be of concern to some
clients, it is of great benefit when dealing with some third
parties (such as banks in civil-law jurisdictions or potential
purchasers of foundation property) to be able to quickly and
formally prove the entity's existence (3). It can also save
legal fees as there is less need for an additional company to be
set up to provide a 'recognisable' owner to hold certain
assets.

Control

As mentioned, the law allows a founder to retain certain powers.
Nothing in the law prevents a founder becoming a council member,
guardian or (if the council reasonably considers them to be
competent and qualified for the task) investment advisor. As with
trusts, however, there may be tax or asset protection implications
of reserving certain powers or combinations of powers. So it may be
preferable to provide for the consent of the founder (or another
third party) before the council can act in a particular way.

Where the settlor of a trust may retain control in the family
(i.e. by setting up a private trust company (PTC) to act as
trustee), this is not necessary with foundations as the council can
consist of the same people who would have formed the board of the
PTC. Indeed, it is possible to use the foundation as an alternative
to the PTC: the foundation's purpose can be to act as trustee
of underlying trusts. There is, however, the restriction that, if
neither a council member nor a guardian is a Guernsey-licensed
fiduciary, a Guernsey-licensed fiduciary must be appointed as a
'resident agent' with powers to request foundation
documents and supervise its running (4).

Asset protection

Foundations are suitable for asset protection as they divorce
ownership of assets from the founder. Like trusts, their ability to
protect assets in the face of legal claims from outside the
jurisdiction will depend on the location of the assets, the number
of reserved powers and, if relevant, the purpose of the foundation
(for example, whether the assets were placed in the foundation with
the intention of defrauding creditors). Careful drafting and
managing of the foundation will be needed, but there is little
reason, in principle, why the foundation cannot be used as a
suitable alternative vehicle to the trust in this respect.

Dynastic planning

On its own, the foundation is a great alternative to the simple
discretionary trust for preserving the family wealth for future
generations. Guernsey foundations have the benefit over more
traditional foundation jurisdictions, such as Liechtenstein and
Panama, in that the law, and associated service industry, operates
in English and there is a well-developed, well-regulated fiduciary
industry with an established, highly respectable judicial
system.

More complicated succession planning structures can also use the
foundation as an alternative to the trust; for example, the
foundation can act as an umbrella entity holding companies, trusts
or assets. A well-drafted hybrid entity (set up for beneficiaries
and specific purposes) can also operate as an investment vehicle
during the founder's lifetime without some of the possible
constraints present in some trusts, such as the need to produce
income, diversify or invest in lower-risk assets, while switching
to operate for, or pay out to, the beneficiaries on the
founder's death.

2. Charitable

The moniker 'foundation' is often used by charities set
up as trusts as it suggests stability and has a public recognition
that 'trust' perhaps lacks. For philanthropic founders
seeking to form such charities in the future, a Guernsey law
foundation, as opposed to a trust, is now a logical choice. There
is also the benefit that the foundation's purposes do not have
to be exclusively charitable, so the vehicle can be more flexible
than the traditional 'charitable' trust – for
example, it may not be necessary to set up a separate corporate
entity for profit-focused aspects of the operation.

3. Corporate

A foundation is useful for corporates looking to, for example,
create an orphan structure whereby the assets of a particular
entity can be held in a foundation, rather than having a parent
company and being an asset on that company's balance sheet. The
foundation can, for example, have as its purpose the incorporation
and ownership of a general partner of a fund. It is an alternative
to the purpose trust for such structuring, and some consider it
preferable. And there is potential for the foundation to be used
for other corporate purposes, including subordinated debt, private
equity structuring and providing employee benefits.

Conclusion

The foundation has many uses, including as an alternative to
many of the functions of trusts. More uses will no doubt develop
over time, especially in the corporate sphere, as the common-law
jurisdictions (as they react to changing economic demands) get to
grips with the foundation and its potential.

(1 - Which may be unlimited. 2 - If the founder is a natural
person, the powers may only be reserved for a period not exceeding
the duration of their life. If the founder is a corporation, the
powers may be reserved for a period not exceeding 50 years from the
date of establishment (s11(2) of the 2012 law). 3 - Like companies,
the foundation will be issued with a certificate of registration. 4
- This contrasts with other jurisdictions, such as Jersey, where
the qualified person must sit on the foundation's council)

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